Litigation Services Handbook, 2014 Cumulative Supplement: The Role of the Financial Expert, 5th Edition

CHAPTER 10A

GOING CONCERN (NEW)

Elizabeth A. EvansHong Qiao

CONTENTS

10A.1 Introduction

10A.2 Going Concern under Accounting Pronouncements

(a) AU-C 570

(b) International Accounting Standard 1

(c) Liquidation Basis of Accounting

10A.3 Legal Standards

(a) Claims Deemed Unrelated to Going Concern

(b) Negligence versus Fraud

(c) Indications of Bankruptcy or Insolvency

(d) Fraudulent Conveyance

10A.4 Key Factors

(a) Necessity of Judgment on the Part of the Auditor

(b) Types of Evidence Relevant to a Decision

(c) Consideration of Management Plans

APPENDIX: RECOMMENDATIONS FOR MINIMIZING LIABILITY

(a) Documentation

(b) Understanding of the Big Picture

(c) Public Disclosure of Red Flags

LIST OF CASES

NOTES

10A.1 INTRODUCTION

Most financial statement preparations and audits assume a going-concern status for the firm under examination. That is, they assume that the firm will dispose of its inventory in the normal course of business, not in a liquidation sale. Why, however, should management, investors, and auditors make that assumption? How should auditors proceed when they believe that a firm lacks the viability of a going concern?

This chapter examines the duties of auditors to analyze whether the audited firm is a going concern and the duties of management in preparing information for auditors. It will also describe how the legal standards differentiate a going-concern and other issues from those of negligence and fraud. This chapter also briefly describes some basic factors that ...